Lemonade has built a full-stack technology/insurance company that is unencumbered by the outdated status quo. They are harnessing Artificial Intelligence (A.I.) and big data while encouraging good policyholder behavior by donating underwriting profits to a charity. “Old insurance kind of sucks, but Lemonade is different… Lemonade is powered by A.I. and driven by social good” says their YouTube ad.

As one of their early followers, I have followed their journey from the “world’s first peer-to-peer insurance company”, their hiring former AIG executives and behavioral scientist Dan Ariely, their decision to file as a public benefit corporation, their launch in September 2016, and their subsequent growth as they rolled-out across the U.S., and their recent decision to launch internationally with an additional $120M of funding led by Softbank.

Going into 2018 their journey will continue. I see three symbolic paths for the NY-based startup:

#1: Lemonade finds their niche, grows modestly and operates as a semi-profitable business.

In this scenario, Lemonade essentially becomes the Myspace of insurtech—they become popular in certain niches but do not become mainstream, nor “disrupt” the large carriers.

I would imagine that most of Lemonade’s growth has come from the younger, urban, tech-savvy, early adopter types who are disillusioned by traditional insurance. But, will Lemonade “cross the chasm” and evolve from a niche product to a mainstream product? The fact that Lemonade has decided to go international before licensing in all 50 states signifies that they may be hoping to find a stronger foothold overseas—where consumers are open to technology and where the regulations are less cumbersome.

#2: They discover that they have mismanaged their risk, reserving, and pricing and become a case study of failure in InsureTech.

If I were the CEO of Lemonade, I would hire a few actuaries and get on stage at conferences and say “we have a team of top-notch actuaries and we are arming them with the cutting edge tools of A.I. to help them in their ratemaking and reserving.”

Instead, CEO Daniel Schreiber gets on stage and says the future of insurance is “A.I., not actuaries”. Also, Schreiber recently wrote that A.I. will “eat insurance” because A.I. is better at statistics than actuaries.

I question if Lemonade is over-relying on A.I. and flashy marketing, and failing to understand the importance of solid pricing, reserving, and risk management. As an actuary, I’ve learned that risk management is not simply a mathematical exercise, but requires domain expertise to deal with the ambiguity, lack of data, and highly contextual environment that insurers operate in.

This scenario will be Lemonade’s fate if they fail to understand that A.I. is a powerful tool, not a replacement for domain expertise.

In this scenario, Lemonade actually does disrupt the trillion dollar industry. Word of mouth spreads and Lemonade transforms from a niche business to a mainstream business, much like Uber and Facebook. Their model of donating underwriting profits to charity encourages better policyholder behavior. Their offerings are half the price of their large carrier counterparts. Hundreds of millions around the world sign up. They thrive in Africa and Asia where insurance regulations are much less restrictive. They accumulate mountains of data and their A.I. algorithms give them a competitive advantage in underwriting, pricing, and risk management to their competitors. They have a $30 billion IPO and Daniel Schreiber and Shai Wininger gain Elon Musk/Mark Zuckerberg style fame.

While these three paths are only symbolic of Lemonade’s infinite possibilities, Lemonade’s performance in 2018 will indicate which of the three is most likely. Regardless of their fate, they should be applauded for their vision, ambition, and courage. They will provide valuable lessons to all in either their success or failure.

About the author

Erik Wenzel, FSA is an insurtech enthusiast and actuary who writes frequently to help bridge the gap between actuaries and insurtech. Erik’s LinkedIn posts have received over a million views and have sparked a global conversation on the future of the actuarial profession in the insurtech revolution.